Determining Your Corporate Tax in Hong Kong: Paying Your Taxes Correctly
With a simple, low-rate tax system in place, Hong Kong has cemented a reputation for itself as one of the most business-friendly countries in the world for Company incorporation. Further, this guide will provide you with an overview of profit and corporate tax in Hong Kong.
Hong Kong’s corporate tax also serves as profits tax in the country. Being a simple, straightforward tax system, Hong Kong’s profit tax abides by a flat-rate and territorial principle. To further strengthen its position as one of Asia-Pacific’s most sought after investment destinations, the government has introduced tax incentives. In effect, this would further entice foreign investors to its shores.
Hong Kong’s Flat Corporate Tax Rate
Hong Kong follows a territorial taxation system. Thus, taxes will only apply on profits which either arise or derive from conducting trade, business or profession in Hong Kong. If your business profits are outside Hong Kong, they are not eligible for profits tax.
However, this territorial tax system doesn’t distinguish those who are residents and those who are non-residents. This means that if you happen to be a resident of Hong Kong, but your business profits come from outside the country, you are not liable to Hong Kong’s profits tax.
A company’s profits tax in Hong Kong has an assessable rate of 16.5%. Trading profits and any interest income from qualifying debt instruments in Hong Kong will be a concessionary rate of 50% of the normal profits tax rate. The 50% concessional rate is also applicable to offshore businesses of professional reinsurance companies.
Hong Kong incorporates the use of a Single-Tier Tax System (STS). This means that the profits of a Hong Kong company will only get a one-time levy. Once a company has declared its dividends and distributed its profits, then they are no longer considered taxable.
How to File Corporate Tax in Hong Kong
1 April of every year is when the Inland Revenue Department (IRD) of Hong Kong issues the corporate tax profits returns to all those who are taxable. It is advisable that you file your Hong Kong profits tax returns within one month from the issuance date. For a business which has been recently incorporated, the IRD will issue your business with a Hong Kong profits tax return of 18 months from the date after the commencement of your business operations.
You need to submit a complete set of Hong Kong corporate (profits) tax returns to the IRD. A complete set would comprise of the following:
- Your specific profits tax return form (issued by the IRD).
- A supplementary form from the IRD for tax and financial data.
- Certified copy of your balance sheet, auditor’s report, profit and loss accounting report.
- A tax computation revealing the amount of assessable profits (or adjusted loss).
If your company is a small corporation with a gross income which does not exceed HKD500,000 for the basis period, you must file your Hong Kong profits tax return and supplementary form.
What is the Provisional Profits Tax?
Hong Kong’s provisional profits tax is the amount of assessable profits payable on the Year of Assessment. Since assessable profits are only defined at the end of the year, you must issue an estimated tax which is based on numbers from the previous year.
Your estimated provisional tax profits will be paid in 2 stages. The first instalment is 75% of the liability. The remaining 25% is payable after three months. Only once your final assessment is completed based on the actual assessable profits made will credit be given for the provisional tax paid.
What Are the Available Tax Incentives in Hong Kong?
Hong Kong-based companies will get to enjoy the following tax incentives:
- 100% deduction for the capital expenditure on plant and machinery.
- 20% deduction on capital expenditure for each year in 5 consecutive years for installations that are part of a building or structure.
- Immediate writing off for capital expenditure relating to manufacturing plant and machinery and computer hardware and software.
- Tax concessions for gains derived from qualified debt instruments.
- The concessionary tax rate on their offshore business operations for reinsurance companies.
- Tax exemption on any interest gained from any deposit with an authorized institution in Hong Kong (excludes interest received by/or accrued to a financial institution.
- 5 years of assessment write-offs allowed for capital expenditure on the refurbishment of business premises.
- Tax exemption for offshore funds (non-resident individuals, partnerships, trustees of trust estates or corporations) on profits derived from transactions in securities, futures contracts, foreign exchange contracts and more.
- Offshore funds (non-resident individuals, partnerships, trustees of trust estates or corporations) enjoy tax exemption on profits derived from transactions. These include securities, futures contracts, foreign exchange contracts and more. Corporations and authorized financial institutions under the Securities and Futures Ordinance must conduct this procedure. Meanwhile, non-resident entities must not carry on any other business in Hong Kong.
What About Losses Incurred in a Business?
If your Hong Kong-based company incurs losses during the accounting year, these losses can be carried forward indefinitely. This helps set off against future profits. Further, there are no group relief losses in Hong Kong, and capital loss expenses will not amount to deductions.